Junior ISA Advice - Three Popular Assumptions Which Are Wrong
In talking with a number of people just lately about Junior ISAs I picked up on three surprising misunderstandings or assumptions which could well be holding many parents back from helping their child financially in the future. In this article I'm going to look at these three issues and try to provide a little clarification.
For anyone familiar with ISAs it is often not realised that for adults it is usual to be able to open an ISA each year. Each individual ISA will obviously have its upper limit in terms of how much can be contributed within each financial year, but with multiple ISAs it is possible to either hedge your bets, and take advantage of differing investment opportunities, or even have individual pots specifically ring fenced for future benefit.
Whilst some people don't actually realise this, many people who are familiar with the way adult ISAs work mistakenly believe that the same thing is possible when it comes to children's ISAs. However, this is not the same at all, and the regulations are very clear that the maximum number of ISAs a child can have is just two.
When you set up your child with their ISA you can either choose to go for a cash account or a stocks and shares account. If you wish to then you can also opt to open one of each, but this is the maximum you will be able to open on behalf of your child. Whilst you may if you wish open a number of ordinary savings accounts for your child, they will only be able to have either one or two of these children's ISAs, and during subsequent years no further accounts can be opened.
Once your child reaches the age of 18 then their Junior ISA will transfer to a normal standard adult ISA, and of course from that point on they will be able to open subsequent ISAs each financial year should they wish to.
Another assumption or misunderstanding which I have come across recently relates to the maximum amount which can be deposited in a children's ISA. Currently the limit is £3600 per year. This means that if your child has one account this is the maximum which can be credited to it during one financial year, and if they have two accounts then it is the maximum which can be credited across both.
The assumption though is that this maximum limit is fixed. It is not. Quite clearly this is a long-term savings account, and whilst £3600 seems a perfectly reasonable amount in 2012, if your child is just three years old then we're talking about an investment over the next decade and a half. During that time it will be inevitable that the limit will need to be increased, and this is expected. Financial regulations state that the Children's ISA limits will be raised every 12 months in line with inflation from 2013.
Finally one rather surprising assumption I have come across lately is that there is little point setting up a Children's ISA since the government is no longer contributing vouchers in the same way they did with a Child Trust Fund.
Let's not forget that contributing £100 a month to a Junior ISA at a rate of 5% would result in an extremely useful pot of £35,000 by the time they reach 18. A maximum annual contribution of £3600 would create a nest egg of over £100,000. Far from there being little point, it seems very clear to me that this goes a very long way towards helping our children benefit from a fantastic start in life, even without a £250 voucher to kick start it all!
For anyone familiar with ISAs it is often not realised that for adults it is usual to be able to open an ISA each year. Each individual ISA will obviously have its upper limit in terms of how much can be contributed within each financial year, but with multiple ISAs it is possible to either hedge your bets, and take advantage of differing investment opportunities, or even have individual pots specifically ring fenced for future benefit.
Whilst some people don't actually realise this, many people who are familiar with the way adult ISAs work mistakenly believe that the same thing is possible when it comes to children's ISAs. However, this is not the same at all, and the regulations are very clear that the maximum number of ISAs a child can have is just two.
When you set up your child with their ISA you can either choose to go for a cash account or a stocks and shares account. If you wish to then you can also opt to open one of each, but this is the maximum you will be able to open on behalf of your child. Whilst you may if you wish open a number of ordinary savings accounts for your child, they will only be able to have either one or two of these children's ISAs, and during subsequent years no further accounts can be opened.
Once your child reaches the age of 18 then their Junior ISA will transfer to a normal standard adult ISA, and of course from that point on they will be able to open subsequent ISAs each financial year should they wish to.
Another assumption or misunderstanding which I have come across recently relates to the maximum amount which can be deposited in a children's ISA. Currently the limit is £3600 per year. This means that if your child has one account this is the maximum which can be credited to it during one financial year, and if they have two accounts then it is the maximum which can be credited across both.
The assumption though is that this maximum limit is fixed. It is not. Quite clearly this is a long-term savings account, and whilst £3600 seems a perfectly reasonable amount in 2012, if your child is just three years old then we're talking about an investment over the next decade and a half. During that time it will be inevitable that the limit will need to be increased, and this is expected. Financial regulations state that the Children's ISA limits will be raised every 12 months in line with inflation from 2013.
Finally one rather surprising assumption I have come across lately is that there is little point setting up a Children's ISA since the government is no longer contributing vouchers in the same way they did with a Child Trust Fund.
Let's not forget that contributing £100 a month to a Junior ISA at a rate of 5% would result in an extremely useful pot of £35,000 by the time they reach 18. A maximum annual contribution of £3600 would create a nest egg of over £100,000. Far from there being little point, it seems very clear to me that this goes a very long way towards helping our children benefit from a fantastic start in life, even without a £250 voucher to kick start it all!
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